The maintenance of reliable electric service over the power grid requires power grid operators to ensure that the production of energy by electrical generators (supply) on the grid is constantly balanced against the consumption of electricity on the grid (consumer demand).
In the United States regulatory responsibility for the power grid is primarily held by the Federal Energy Regulatory Commission (FERC). Operational responsibility for developing and operating a balanced electric grid is held by individual utilities or independent regional grid operators known in the industry as Independent System Operators (“ISO's”) or Regional Transmission Organizations (“RTO's”). There are currently seven RTOs/ISO's operating in the United States. Collectively these entities service states and regions that represent a substantial portion of national power consumption.
In areas served by RTO's/ISO's, FERC has required that in addition to managing the operation of the power grid, the RTO's and ISO's must manage the price of power generated and consumed on the grid using pricing principles that value the price of energy at the instantaneous intersection of supply and demand. To do this, the RTO's use pricing auctions. These price auctions, in addition to setting the price of electricity, must also obtain enough electricity production for the grid at the correct locations to ensure that the grid is capable of delivering adequate energy to the location of demand on the distribution grid. This process establishes the Locational Marginal Price (“LMP”) for the next incremental energy production resource at a location.
In order to achieve these objectives the RTO employs a process know as Security Constrained Economic Dispatch. This process accepts generation offers in sequence from the lowest priced offer to the highest priced offer, up to an amount needed to satisfy load conditions. This economically efficient method is constrained, however, by the physical limitations of the grid to transmit power from where it is generated to where it is needed. Thus, if a low cost generating unit would be used based on price, but use of that unit would overload a transmission line and exceed its safe limits (for example, for voltage and thermal loading limits), then that unit will not be used. Instead, a more expensive unit which, due to its location, will not jeopardize the reliability of electric service, will be used. The first aspect of the process described above (the “economic dispatch”) is achieved by a series of mathematical algorithms which choose the generating units to be dispatched so as to minimize production cost. Prices are then established on a locational basis with the prices in different locations reflecting the cost of the highest priced generator actually needed to provide service to a given location. The process of assuring locational prices uses a series of mathematical algorithms over energy management systems.
Historic Use of Load on the Grid
Historically, reliability of the grid was maintained by command and control measures under which the RTO could physically change the flow of energy on the grid if necessary to preserve reliability and avoid blackouts. Generation was increased or decreased as needed and load (demand) was presumed to be inflexible. This process did not rely upon price signals to maintain reliability. Therefore, it did not lead to economically efficient results while preserving reliability.
Today, grid operators recognize that load will respond to price signals and thus will pay consumers to curtail their consumption of electricity. This payment reflects the value that such curtailment provides to the grid in terms of enhanced reliability, and more efficient prices for electricity.
Market rules now permit customers to make offers to curtail their electricity use directly to the grid operator. These offers will be accepted so long as the price is lower than the competing offer by another resource, such as a generator. If accepted, the customer will curtail its use pursuant to the offer accepted by the grid and be paid accordingly.
This process enhances reliability by insuring that the grid is in continuous physical balance; that is, supply and demand are continuously matched. Moreover, it achieves this objective in the most economically efficient method possible, by accepting offers to curtail use when these offers are of lower cost than alternative means of maintaining balance (i.e., buying more supply). This mechanism benefits society as a whole by reducing the cost of electricity. And of course this process benefits individual customers by enabling them to control their individual electricity bills.
Policies in Favor of Reduction of Demand
Regulatory authorities and legislatures have begun to adopt policies intended to facilitate load control by customers (i.e., reduction of energy use by customers). These policies have been adopted in recognition of the fact that load control is in the public interest. For example, these policies provide compensation to customers who provide load control because load control reduces average prices, maintains reliability of the grid, and assists in meeting environmental objectives.
The price of electricity is set in the markets by the marginal cost, that is, the cost of the highest priced source which is needed to satisfy demand. More expensive sources are not used and are not paid. Demand reduction has the effect of reducing the amount of demand that must be satisfied and therefore reduces the price of electricity, as more expensive sources are not needed or called upon.
The price of electricity on wholesale markets changes every 15 minutes. That is, every 15 minutes different resources are used to satisfy demand, based on the economic dispatch described above.
Consequently, a need exists for improved systems to control and reduce electricity use by a customer, and to measure and price that reduction.